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Canadian economy to weaken in 2012, IMF warns

Managing Director of the International Monetary Fund (IMF) Christine Lagarde gestures during her speech about the economic Challenges in 2012 at the German Council on Foreign Relations in Berlin, Monday, Jan. 23, 2012. (AP / Jens Meyer)

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The Canadian Press
Published Tuesday, January 24, 2012 4:58PM EST
Last Updated Saturday, May 19, 2012 7:14AM EDT

OTTAWA - Canada's recovery is being dragged down by a cascading crisis in Europe and weakening conditions elsewhere, the International Monetary Fund suggests in its latest economic outlook.

The Washington-based monitor of global financial affairs said Tuesday that Canada's economy will likely now grow by only 1.7 per cent, more than half a point below 2011's 2.3 per cent advance.

The new forecast is three notches lower than the Bank of Canada's estimate just last week -- and two-tenths of a point lower than its own previous call in September.

And the IMF doesn't see the economy in Canada strengthening much in 2013. Unlike the central bank, which predicts 2.8 per cent expansion next year, it says Canada's recovery will be restrained to two per cent.

That's still tops among G7 countries for the two years combined, but only because the other six members of the club will be hit even harder by the European problems.

German, Italy and Spain will record negative growth in 2012 and the eurozone as a whole will suffer a mild recession, the IMF said.

The latest quarterly outlook from the leading economic institution is full of dark foreboding that stops just short of predicting a second global recession.

"The updated ... projections see global activity decelerating but not collapsing," it said. "Most advanced economies avoid falling back into a recession, while activity in emerging and developing economies slows from a high pace."

Global growth is now expected to slow to 3.3 per cent this year, from about four per cent in its earlier forecast.

However, the IMF warns that the dangers to the global economy have intensified since its last review of conditions, particularly in Europe. If Europe unravels, the global outlook is subject to considerable downward revisions, it said.

If markets were to push up borrowing costs for vulnerable countries in Europe, the ripple effects could easily result in global economic growth slowing two percentage points more than currently assumed, the IMF warns.

Under that scenario, the advanced world and likely Canada could easily be pushed into a second recession.

On Monday, IMF head Christine Lagarde stressed the precarious nature of the global situation and urged the international community to take immediate and decisive action to hold off catastrophe.

"The longer we wait, the worse it will get," she told the German Council of Foreign Affairs. "The only solution is to move forward together. Our collective economic future depends on it."

Lagarde compared to situation to the 1930s and said the world had reached a defining moment.

The alarmist language precedes meetings of world leaders at the World Economic Forum in Davos, Switzerland, later this week, where leaders are expected to focus on the containment strategies for Europe's debt crisis.

Lagarde called for the erection of a firewall around Europe to prevent contagion from spreading and crippling the global financial markets, and is attempting to increase the IMF's lending resources by up to US$500 billion.

Last week, Finance Minister Jim Flaherty, who will attend the Davos meetings, said Europe's commitment of US$200 billion to the fund needs to increase before other countries, including Canada, are asked to pony up.

The IMF report, as the Bank of Canada did last week, sees Europe as the greatest risk to the fragile global recovery. But it points out that the problems facing the world are go beyond Europe.

It said debt and debt consolidation plans in United Sates and Japan also have the potential of triggering "turmoil in global bond and currency markets."

"Moreover, concerns about geopolitical oil supply risks are increasing," it added. "The oil market impact of intensified concerns about an Iran-related oil supply shock (or an actual disruption) would be large, given limited inventory and spare capacity buffers, as well as the still-tight physical market conditions expected throughout 2012."

The IMF said indebted countries must balance the needs of supporting the economy in the current fragile state, and the longer term need to bring down deficits and debts.

Noting the weakness of many economies, the report stressed that the "rhythm of fiscal adjustment" needs to take into account the immediate impact.

And it said "automatic stabilizers should be allowed to operate in the event that growth slows more than expected ... in the United States, expiring policies designed to support demand need to be renewed."

The reference is likely to payroll tax cuts which the White House has asked Congress to extend.

The report contained no specific section on Canada, although the IMF issued a major report on the country in December.